Employee Benefit Plan Audits: What It Is and When You Might Need One

Background

The Employee Retirement Income Security Act of 1974 (ERISA) requires that certain companies offering employee benefit plans must have their plan audited annually. The audit reports not only on the plan’s financial standing but the process can also highlight opportunities for improvement within plan operations, efficiency, controls and compliance with IRS and the U.S. Department of Labor (DOL) regulations.

This audit helps protect the financial integrity of the employee benefit plan, which allows users of the financial statements (plan management, regulators and even participants) to determine whether the necessary funds will be available to pay retirement, health and other promised benefits to participants.

Benefit Plan Audit Requirements

A company’s expansion beyond 100 employees is a significant milestone. While corporations may see surpassing this level as a cause for celebration, the DOL may see it as a signal to scrutinize your employee-benefit plan more closely.

The number of qualified participants in your employee benefit plan affects your audit needs. If your company has 100 or more eligible participants at the start of the plan year, an audit by an independent CPA is required. “Eligible” being the keyword in this circumstance because even if some of your employees opt not to participate, they still count toward the audit requirement. Eligible participants include:

• Active eligible employees;
• Retired or separated employees who presently receive or can receive 401(k) benefits; and
• Beneficiaries of deceased employees who receive or are eligible for benefits.

Audit Exceptions

There are a few exceptions to the conventional practice of requiring an audit for a Plan with more than 100 eligible employees.

Partial Plan Years

You can defer your audit until the next year if you have a partial plan year that lasts seven months or less. You will still have to conduct an audit for the partial plan year if the number of eligible participants falls below 100 the following year.

80-120 Rule

The 80-120 rule is another notable exception. Your audit obligation will remain the same as the previous year if the number of eligible employees is between 80 and 120 as of the first day of the Plan year. You won’t need an audit for either year if you had 85 qualified participants in the first year and 115 in the second. If the number of eligible participants does not exceed 120, this can go on indefinitely. Once you reach 120 employees, however, you will need an audit for that year and will continue to need one if the number of eligible employees remains at 100 or above.

Form 5500

You are not required to file a Form 5500 for a pension benefit plan that is any of the following:

• An unfunded excess benefit plan
• A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) that involves SIMPLE IRAs
• A Simplified Employee Pension Plan (SEP) or a salary reduction SEP. SEP is a pension plan that allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP.

In addition, you are also not required to file a Form 5500 for a welfare benefit plan that is any of the following:

• Welfare Benefit Plan that covered fewer than 100 participants as of the beginning of the plan year and is unfunded, fully insured, or a combination of insured and unfunded.
  • Unfunded Welfare Benefit Plan that has its benefits paid as needed directly from the general assets of the employer or employee organization that sponsors the plan.  Plans that are not unfunded include those plans that received employee (or former employee) contributions during the plan year and/or used a trust or separately maintained fund to hold plan assets or to act as a conduit for the transfer of plan assets during the year.
  • Fully Insured Benefit Plan that has its benefits provided solely through insurance contracts or policies, the premiums for which must be paid directly to the insurance carrier by the employer or employee organization from general assets or partially from general assets and partly from contributions by employees or members.
• Government Plan
• Employee Benefit Plan that is maintained only to comply with workers’ compensation, unemployment compensation or disability insurance laws
• Welfare Benefit Plan that is maintained solely for:
  • one individual or one individual and their spouse, who wholly own a trade or business, whether incorporated or unincorporated; or
  • partners or the partners and their spouses in a partnership.

What to Expect During a Benefit Plan Audit

To ensure a seamless audit, plan sponsors should keep detailed records and prepare ahead of time by studying the auditor’s desired items before the audit begins. The third-party administrator can often assist the plan sponsor by providing much of the necessary information, such as:

• Plan documents and modifications to the plan
• IRS Opinion Letter on the plan document
• Summary plan description and any amendments
• Plan committee minutes
• Service providers’ agreements
• Employee census (list of all paid employees for the year including key demographic data)
• Service Organization Control (SOC) Report covering internal control processes for outside service organizations working with your plan
• Trust and recordkeeping reports
• Distributions, loans or other plan activity
• Proof of employee crime insurance coverage (fidelity bond)

Being prepared and knowing what to expect is essential for ensuring a smooth audit. The first step is to understand what will trigger an audit requirement for your plan and continually and actively monitor your plan’s status annually. Once you’ve identified or suspect your plan will need an audit, it’s highly recommended that you contact your BMF advisor for a compliance review. Taking this step provides a great advantage if there are plan issues that need to be addressed, as it may provide an opportunity to fully correct them before you enter the plan year under audit.

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